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Markets are feeling jittery before the U.S. election. But history tells us markets tend to be bullish in the three months after the election, regardless of which party wins. Kim Parlee speaks with Michael Craig, Head of Asset Allocation, TD Asset Management, on why investors should look beyond the election and sail through the volatility.
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- We are only one week away from the US election, and we are seeing some very jittery days on the markets. But my next guest says, perhaps we should be focusing a little more on the certainty after the election, as opposed to all the uncertainty before the election.
Michael Craig is Head of Asset Allocation with TD Asset Management. He joins me now. Michael, good to see you. And I guess we should start off with the fact there's just a boatload of volatility in the markets this week. Is it election jitters, is COVID-19, is it a lack of a stimulus deal, or is it all of the above?
- I think I'm going to take the latter two. I think it's a function of accelerating COVID cases as well as the continued inability to get a fiscal deal done. I think those two issues are really driving markets. I think in many ways markets are getting a little bit more sanguine towards the election outcome, as evidenced by stocks that are more in tune with what Biden might do versus Trump.
- Well that leads to the next question. The last time I had you on we talked about four scenarios for possible outcomes, and you went through in terms of the Democrats and the Republicans, Congress and the presidency. What do you see the markets pricing in right now? Is it a Biden presidency? But what could happen to Congress?
- You know it's kind of funny. I think, when you look at the actual polling data, it's overwhelmingly pro Biden, and we'll call it 50/50 for the Senate. When I talk to market participants, it still feels like many expect Trump to win, and I don't know if this is just kind of a behavioral aspect that people trying to make up for mistakes four years ago or not, but I'm not convinced that the market believes Biden is going to pull this out.
Which I find interesting, because when you actually look at a variety of polling sites that aggregate data, and obviously, there could be errors here and there. I think it's pretty overwhelmingly supportive of Biden. So I thought it interesting, still in the mindset that I'll go with what the data tells me, but I'll prepare for all scenarios. And I actually don't think that the markets are pricing as much of a Biden victory as many would be likely to believe.
Interesting. So let's just take that-- put that aside for a moment. And again, we'll all be watching it pretty closely. You brought in a chart here, I think which is interesting, because I think it speaks to many possible outcomes. But explain what it is. This again is a return distribution, a look at what happened in three months post every election we've had the United States since the 1920s. What is notable about what we're looking at?
Yeah, so we looked at the last 100 years of markets post elections. We took, from election day, three months after, to see what was the general consensus or likely outcome for markets. And there's a couple of things that are really interesting here.
First point, generally, markets are bullish after elections regardless of who wins. So Democrat, Republican, you usually see a rally after an election. And that is really based on uncertainty. Markets hate uncertainty. And once you get an election result, markets deal with it. No matter who wins, we'll deal with it, and we'll likely rally.
Where you had selloffs were very, very specific periods in time. 2008, worst period after when Obama won. And of course, we were going through the global financial crisis, still quite unsure about the outcomes. They hadn't really come in with the full force of policy, both fiscal and monetary yet. And so that was really the driver of markets. It wasn't Obama winning, it was the fact that the US property markets were collapsing and causing the global financial system to really come to its knees.
The second worst period was 1940. That was significant because that was when the Axis powers were actually getting the upper hand in Europe. The markets were starting to become quite concerned with the prospects of Europe's being run by the Nazis. And so again, a very exogenous shock that was driving markets and really was much more potent than what happened in the US election.
And I guess the third kind of negative outcome was 2000, with, of course, disputed, or disputed election over the hanging chads in Florida, et cetera between George W Bush and Al Gore. And this is probably-- a few months ago, I think many were thinking that this was a risk for this market. This election I still think it's a tail risk. It's possible, but unlikely. But that also saw the markets come off.
And so all of these three things have one thing in common, that kind of an exogenous force will start driving markets lower. Excluding that, you should expect to see a reasonably good rally if history repeats. I understand, obviously we have-- this is another nuanced period with COVID-19. But I think the bulk of that pricing of COVID and all the policy actions after that was more of a spring thing. I don't think it's as much of a force driving markets bigger picture today than it was in the spring.
So net-net, biggest, worst case outcome after this election is a disputed election where this drags on for weeks on end. But if we don't have that outcome, I think overall you're going to see a fairly sanguine equity market in November through the new year.
Well we will see, I guess. To your point, it just depends how the market prices, and whether that exogenous risk turns into something after the fact. But that's an interesting chart, if that is not, in fact, the fact. Let me ask you, Mike, you know you're head of asset allocation at TD Asset Management.
I know that you spent a lot of time, obviously, looking at the present, but you spent a lot more time thinking about the future. So what are you focusing on long term?
- Yeah, for us, we are looking at what we believe to be early cycle dynamics, whereby we're slowly coming out of recession. It's early days. We've got tremendously loose monetary policy, which is typically good for equity markets. We've got very, very loose fiscal policy, which is very, very stimulative to asset prices. And the third, and it's a little bit counter-intuitive, but we are starting with a fairly high unemployment rate.
Now, not great for the workforce-- a bunch of people out of work-- but usually, stock markets are most bullish when you have this period of unemployment because it leads to companies being able to add workers without being faced with having to pay higher salaries, and so it tends to be supportive for margins.
And so I think there's a lot of certainly things going on right now. We've got a pandemic. A major, very, very contentious US election. The macro backdrop is actually quite supportive for equities, and therefore leads us to be quite bullish on stocks on kind of a 12 to 18 month horizon.
- Interesting outlook. Mike, It's always a pleasure. Thanks so much.
- My pleasure, Kim. Have a great evening.
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- We are only one week away from the US election, and we are seeing some very jittery days on the markets. But my next guest says, perhaps we should be focusing a little more on the certainty after the election, as opposed to all the uncertainty before the election.
Michael Craig is Head of Asset Allocation with TD Asset Management. He joins me now. Michael, good to see you. And I guess we should start off with the fact there's just a boatload of volatility in the markets this week. Is it election jitters, is COVID-19, is it a lack of a stimulus deal, or is it all of the above?
- I think I'm going to take the latter two. I think it's a function of accelerating COVID cases as well as the continued inability to get a fiscal deal done. I think those two issues are really driving markets. I think in many ways markets are getting a little bit more sanguine towards the election outcome, as evidenced by stocks that are more in tune with what Biden might do versus Trump.
- Well that leads to the next question. The last time I had you on we talked about four scenarios for possible outcomes, and you went through in terms of the Democrats and the Republicans, Congress and the presidency. What do you see the markets pricing in right now? Is it a Biden presidency? But what could happen to Congress?
- You know it's kind of funny. I think, when you look at the actual polling data, it's overwhelmingly pro Biden, and we'll call it 50/50 for the Senate. When I talk to market participants, it still feels like many expect Trump to win, and I don't know if this is just kind of a behavioral aspect that people trying to make up for mistakes four years ago or not, but I'm not convinced that the market believes Biden is going to pull this out.
Which I find interesting, because when you actually look at a variety of polling sites that aggregate data, and obviously, there could be errors here and there. I think it's pretty overwhelmingly supportive of Biden. So I thought it interesting, still in the mindset that I'll go with what the data tells me, but I'll prepare for all scenarios. And I actually don't think that the markets are pricing as much of a Biden victory as many would be likely to believe.
Interesting. So let's just take that-- put that aside for a moment. And again, we'll all be watching it pretty closely. You brought in a chart here, I think which is interesting, because I think it speaks to many possible outcomes. But explain what it is. This again is a return distribution, a look at what happened in three months post every election we've had the United States since the 1920s. What is notable about what we're looking at?
Yeah, so we looked at the last 100 years of markets post elections. We took, from election day, three months after, to see what was the general consensus or likely outcome for markets. And there's a couple of things that are really interesting here.
First point, generally, markets are bullish after elections regardless of who wins. So Democrat, Republican, you usually see a rally after an election. And that is really based on uncertainty. Markets hate uncertainty. And once you get an election result, markets deal with it. No matter who wins, we'll deal with it, and we'll likely rally.
Where you had selloffs were very, very specific periods in time. 2008, worst period after when Obama won. And of course, we were going through the global financial crisis, still quite unsure about the outcomes. They hadn't really come in with the full force of policy, both fiscal and monetary yet. And so that was really the driver of markets. It wasn't Obama winning, it was the fact that the US property markets were collapsing and causing the global financial system to really come to its knees.
The second worst period was 1940. That was significant because that was when the Axis powers were actually getting the upper hand in Europe. The markets were starting to become quite concerned with the prospects of Europe's being run by the Nazis. And so again, a very exogenous shock that was driving markets and really was much more potent than what happened in the US election.
And I guess the third kind of negative outcome was 2000, with, of course, disputed, or disputed election over the hanging chads in Florida, et cetera between George W Bush and Al Gore. And this is probably-- a few months ago, I think many were thinking that this was a risk for this market. This election I still think it's a tail risk. It's possible, but unlikely. But that also saw the markets come off.
And so all of these three things have one thing in common, that kind of an exogenous force will start driving markets lower. Excluding that, you should expect to see a reasonably good rally if history repeats. I understand, obviously we have-- this is another nuanced period with COVID-19. But I think the bulk of that pricing of COVID and all the policy actions after that was more of a spring thing. I don't think it's as much of a force driving markets bigger picture today than it was in the spring.
So net-net, biggest, worst case outcome after this election is a disputed election where this drags on for weeks on end. But if we don't have that outcome, I think overall you're going to see a fairly sanguine equity market in November through the new year.
Well we will see, I guess. To your point, it just depends how the market prices, and whether that exogenous risk turns into something after the fact. But that's an interesting chart, if that is not, in fact, the fact. Let me ask you, Mike, you know you're head of asset allocation at TD Asset Management.
I know that you spent a lot of time, obviously, looking at the present, but you spent a lot more time thinking about the future. So what are you focusing on long term?
- Yeah, for us, we are looking at what we believe to be early cycle dynamics, whereby we're slowly coming out of recession. It's early days. We've got tremendously loose monetary policy, which is typically good for equity markets. We've got very, very loose fiscal policy, which is very, very stimulative to asset prices. And the third, and it's a little bit counter-intuitive, but we are starting with a fairly high unemployment rate.
Now, not great for the workforce-- a bunch of people out of work-- but usually, stock markets are most bullish when you have this period of unemployment because it leads to companies being able to add workers without being faced with having to pay higher salaries, and so it tends to be supportive for margins.
And so I think there's a lot of certainly things going on right now. We've got a pandemic. A major, very, very contentious US election. The macro backdrop is actually quite supportive for equities, and therefore leads us to be quite bullish on stocks on kind of a 12 to 18 month horizon.
- Interesting outlook. Mike, It's always a pleasure. Thanks so much.
- My pleasure, Kim. Have a great evening.
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